LSC Communications, Inc. (NYSE: LKSD) today reported
financial results for the third quarter of 2019.
Financial Highlights:
- Net cash provided by operating activities of $86 million in the
third quarter of 2019, compared to net cash from operating
activities of $0 million in the third quarter of 2018
- Non-GAAP free cash flow of $75 million, compared to ($15)
million in the third quarter of 2018
- Net sales of $834 million compared to $1,015 million in the
third quarter of 2018
- Organic net sales decrease of 9.3% from the third quarter of
2018
- GAAP net income of $24 million, or $0.69 per diluted share,
compared to net loss of $4 million, or $0.12 per diluted share in
the third quarter of 2018
- Non-GAAP net loss of $2 million, or $0.06 per diluted share,
compared to non-GAAP net income of $25 million, or $0.74 per
diluted share in the third quarter of 2018
- Non-GAAP adjusted EBITDA of $49 million, or 5.9% of net sales,
compared to $90 million, or 8.9% of net sales, in the third quarter
of 2018
“I am pleased with the very strong free cash flow performance in
the quarter, and our focus remains on initiatives designed to
deepen our customer relationships in order to further strengthen
our leadership position in our industry” said Thomas J. Quinlan
III, LSC Communications’ Chairman, President and Chief Executive
Officer. “We continue to take the necessary actions to reduce costs
and decrease leverage.”
Net Sales
Third quarter net sales were $834 million, down $181 million, or
17.9%, from the third quarter of 2018. After adjusting for
acquisitions, dispositions, changes in foreign exchange rates and
pass-through paper sales, organic net sales decreased 9.3% from the
third quarter of 2018. The decrease in organic net sales was
largely due to the ongoing impact of digital substitution on
magazine and catalog volume and lower education book volume driven
by earlier back-to-school production that benefitted the first half
of 2019.
GAAP Net Income/Loss
The third quarter 2019 net income was $24 million, or $0.69 per
diluted share, compared to net loss of $4 million, or $0.12 per
diluted share, in the third quarter of 2018. The third quarter 2019
net income included the $45 million pre-tax merger termination fee
received from Quad Graphics ($34 million net of tax) partially
offset by other after-tax charges of $8 million. The third quarter
2018 net loss included after-tax charges of $29 million. These
items are excluded from the presentation of non-GAAP net income.
Additional details regarding the amount and nature of these
adjustments and other items are included in the attached
schedules.
Non-GAAP Adjusted EBITDA and Non-GAAP Net Loss
Non-GAAP adjusted EBITDA in the third quarter of 2019 was $49
million, or 5.9% of net sales, compared to $90 million, or 8.9% of
net sales, in the third quarter of 2018. The decrease in non-GAAP
adjusted EBITDA was primarily driven by volume declines, partially
offset by the benefit of a $5.7 million gain on the
previously-announced sale of the commingle business.
Non-GAAP net loss totaled $2 million, or $0.06 per diluted
share, in the third quarter of 2019 compared to non-GAAP net income
of $25 million, or $0.74 per diluted share in the third quarter of
2018 primarily due to the $45 million merger termination fee
received from Quad Graphics. Reconciliations of net loss to
non-GAAP adjusted EBITDA and non-GAAP net income are presented in
the attached schedules.
2019 Guidance
The Company’s updated full-year guidance for 2019 as shown in
the table below.
Guidance
Previous
Guidance
Net sales
$3.35 to $3.40 billion
$3.45 to $3.55 billion
Non-GAAP adjusted EBITDA
$180 to $200 million
$200 to $240 million
Net pension income
$35 million
$35 million
Non-GAAP adjusted EBITDA excluding net
pension income
$145 to $165 million
$165 to $205 million
Depreciation and amortization
$115 to $125 million
$115 to $125 million
Interest expense
$75 to $79 million
$75 to $79 million
Non-GAAP effective tax rate(2)
Not estimable
30% to 35%
Capital expenditures
$65 to $75 million
$75 to $85 million
Free cash flow (1)
$60 to $100 million
$60 to $100 million
Diluted share count
33 to 34 million
34 to 35 million
(1)
Free cash flow is defined as net cash
provided by operating activities less capital expenditures. The
2019 Guidance for free cash flow includes $45 million of gross
proceeds received in connection with the termination of the merger
with Quad Graphics, less transaction costs of approximately $21
million. The $35 million expected net proceeds from the sale of the
land and building in Torrance, California is not included in the
2019 Guidance for free cash flow.
(2)
Full-year estimated Non-GAAP pre-tax
income (loss) is expected to finish in a small income or net loss
position, making the tax rate not reasonably estimable.
Certain components of the guidance given in the table above are
provided on a non-GAAP basis only, without providing a
reconciliation to guidance provided on a GAAP basis. Information is
presented in this manner, consistent with SEC rules, because the
preparation of such a reconciliation could not be accomplished
without "unreasonable efforts." The Company does not have access to
certain information that would be necessary to provide such a
reconciliation, including non-recurring items that are not
indicative of the Company's ongoing operations. Such items include,
but are not limited to, restructuring charges, impairment charges,
pension settlement charges, acquisition-related expenses, gains or
losses on investments and business disposals, losses on debt
extinguishment, merger-related expenses and other similar gains or
losses not reflective of the Company's ongoing operations. The
Company does not believe that excluding such items is likely to be
significant to an assessment of the Company's ongoing operations,
given that such excluded items are not indicators of business
performance.
Conference Call
LSC Communications will host a conference call and live webcast
to discuss its third quarter results today, Thursday, November 7,
at 8:30 a.m. Eastern Time (7:30 a.m. Central Time). The live
webcast will be accessible on LSC’s website, www.lsccom.com, or
through this link.
Individuals wishing to dial in to the call or access the live
webcast must register in advance. After registering, participants
will receive dial-in numbers, a passcode, and a link to access the
live event.
A webcast replay will be archived on LSC’s web site for 90 days
after the call.
About LSC Communications
With a rich history of industry experience, innovative solutions
and service reliability, LSC Communications (NYSE: LKSD) is a
global leader in print and digital media solutions. Our traditional
and digital print-related services and office products serve the
needs of publishers, merchandisers and retailers around the world.
With advanced technology and a consultative approach, our supply
chain solutions meet the needs of each business by getting their
content into the right hands as efficiently as possible.
For more information about LSC Communications, visit
www.lsccom.com.
Use of non-GAAP Information
This news release contains certain non-GAAP measures. The
Company believes that these non-GAAP measures, such as non-GAAP
adjusted EBITDA, non-GAAP adjusted EBITDA margin, non-GAAP net
income/loss and free cash flow, when presented in conjunction with
comparable GAAP measures, provide useful information about the
Company’s operating results and liquidity and enhance the overall
ability to assess the Company’s financial performance. The Company
uses these measures, together with other measures of performance
under GAAP, to compare the relative performance of operations in
planning, budgeting and reviewing the performance of its business.
Non-GAAP adjusted EBITDA, non-GAAP adjusted EBITDA margin, non-GAAP
net income/loss and free cash flow allow investors to make a more
meaningful comparison between the Company’s core business operating
results over different periods of time. The Company believes that
non-GAAP adjusted EBITDA, non-GAAP adjusted EBITDA margin, non-GAAP
net income/loss and free cash flow, when viewed with the Company’s
results under GAAP and the accompanying reconciliations, provides
useful information about the Company’s business without regard to
potential distortions. By eliminating potential differences in
results of operations between periods caused by factors such as
depreciation and amortization methods, historic cost and age of
assets, financing and capital structures, taxation positions or
regimes, restructuring, impairment and other charges and gain or
loss on certain equity investments and asset sales, the Company
believes that non-GAAP adjusted EBITDA, non-GAAP adjusted EBITDA
margin and non-GAAP net income/loss can provide useful additional
basis for comparing the current performance of the underlying
operations being evaluated. By adjusting for the level of capital
investment in operations, the Company believes that free cash flow
can provide useful additional basis for understanding the Company’s
ability to generate cash after capital investment and provides a
comparison to peers with differing capital intensity.
Forward Looking Statements
This news release may contain "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, and the U.S. Private Securities Litigation Reform
Act of 1995. Readers are cautioned not to place undue reliance on
these forward-looking statements and any such forward-looking
statements are qualified in their entirety by reference to the
following cautionary statements. All forward-looking statements
speak only as of the date of this news release and are based on
current expectations and involve a number of assumptions, risks and
uncertainties that could cause the actual results to differ
materially from such forward-looking statements, including risks
associated with the ability of LSC Communications to perform as
expected as a separate, independent entity and risks associated
with the volatility and disruption of the capital and credit
markets, and adverse changes in the global economy. Readers are
strongly encouraged to read the full cautionary statements
contained in LSC’s filings with the SEC. LSC disclaims any
obligation to update or revise any forward-looking statements.
LSC Communications, Inc. Condensed Consolidated Balance
Sheets As of September 30, 2019 and December 31, 2018 (in millions,
except share and per share data) (UNAUDITED)
September 30, 2019
December 31, 2018
Assets Cash and cash
equivalents
$
15
$
21
Receivables, less allowances for doubtful accounts of $13 in 2019
(2018 - $14)
532
617
Inventories
218
197
Income tax receivable
5
4
Prepaid expenses and other current assets
36
28
Total Current Assets
806
867
Property, plant and equipment-net
466
508
Goodwill
103
103
Other intangible assets-net
125
156
Right-of-use assets for operating leases
174
-
Deferred income taxes
31
27
Other noncurrent assets
87
93
Total Assets
$
1,792
$
1,754
Liabilities
Accounts payable
$
298
$
372
Accrued liabilities
223
199
Short-term debt and current portion of long-term debt
127
108
Short-term operating lease liabilities
44
-
Total Current Liabilities
692
679
Long-term debt
629
659
Pension liabilities
88
132
Restructuring and multi-employer pension liabilities
41
45
Long-term operating lease liabilities
137
-
Other noncurrent liabilities
53
61
Total Liabilities
1,640
1,576
Commitments and Contingencies
Equity Common stock, $0.01 par value
Authorized: 65,000,000 Issued: 35,404,938 shares in 2019 (2018:
35,029,565)
-
-
Additional paid-in capital
834
828
Accumulated deficit
(185
)
(42
)
Accumulated other comprehensive loss
(472
)
(584
)
Treasury stock, at cost: 2,032,134 shares in 2019 (2018: 1,888,205)
(25
)
(24
)
Total Equity
152
178
Total Liabilities and Equity
$
1,792
$
1,754
LSC Communications, Inc. Condensed Consolidated Statements
of Operations For the Three and Nine Months Ended September 30,
2019 and 2018 (in millions, except per share data) (UNAUDITED)
For the Three Months Ended
September 30,
For the Nine Months Ended
September 30,
2019
2018
2019
2018
Net sales
$
834
$
1,015
$
2,548
$
2,887
Cost of sales (1)
716
862
2,201
2,468
Selling, general and administrative expenses (SG&A) (1)
88
77
253
242
Restructuring, impairment and other charges-net
10
1
47
18
Depreciation and amortization
29
34
91
106
(Loss) income from operations
(9
)
41
(44
)
53
Interest expense-net
20
21
58
59
Settlement of retirement benefit obligations
1
-
137
-
Termination fee from Quad
(45
)
-
(45
)
-
Investment and other (income)-net
(9
)
(11
)
(28
)
(35
)
Income (loss) before income taxes
24
31
(166
)
29
Income tax expense (benefit)
-
35
(40
)
36
Net income (loss)
$
24
$
(4
)
$
(126
)
$
(7
)
Net income (loss) per common share: Basic net
income (loss) per share
$
0.69
$
(0.12
)
$
(3.78
)
$
(0.21
)
Diluted net income (loss) per share
$
0.69
$
(0.12
)
$
(3.78
)
$
(0.21
)
Weighted-average number of common shares outstanding:
Basic
33.5
33.2
33.4
34.0
Diluted
33.5
33.2
33.4
34.0
Additional information: Gross margin (1)
14.1
%
15.1
%
13.6
%
14.5
%
SG&A as a % of net sales (1)
10.6
%
7.6
%
9.9
%
8.4
%
Operating margin
nm
4.0
%
nm
1.8
%
Effective tax rate
4.3
%
112.3
%
23.8
%
124.3
%
(1) Exclusive of depreciation and amortization nm = not
meaningful
LSC Communications, Inc. Reconciliation of GAAP
Net (Loss) Income to Non-GAAP Adjusted EBITDA For the Three and
Twelve Months Ended September 30, 2019 and 2018 (in millions)
(UNAUDITED)
For the TwelveMonths Ended For the
Three Months Ended September 30,2019 September
30,2019 June 30,2019 March 31,2019 December
31,2018 GAAP net (loss) income
$
(142
)
$
24
$
(24
)
$
(126
)
$
(16
)
Adjustments: Restructuring, impairment and other
charges - net (1)
64
10
24
13
17
Termination fee from Quad (2)
(45
)
(45
)
-
-
-
Settlement of retirement benefit obligations (3)
137
1
1
135
-
Expenses related to acquisitions, the Merger Agreement and
dispositions (4)
28
10
5
7
6
Purchase accounting adjustments (5)
(1
)
-
-
-
(1
)
Depreciation and amortization
123
29
31
31
32
Interest expense - net
79
20
19
19
21
Income tax (benefit) expense (6)
(43
)
-
(3
)
(37
)
(3
)
Total Non-GAAP adjustments
342
25
77
168
72
Non-GAAP adjusted EBITDA
$
200
$
49
$
53
$
42
$
56
Net sales
$
3,487
$
834
$
869
$
845
$
939
Non-GAAP adjusted EBITDA margin %
5.7
%
5.9
%
6.1
%
5.0
%
6.0
%
For the Twelve Months
Ended
For the Three Months
Ended
September 30, 2018
September 30, 2018
June 30, 2018
March 31, 2018
December 31, 2017
GAAP net (loss) income
$
(65
)
$
(4
)
$
8
$
(11
)
$
(58
)
Adjustments: Restructuring, impairment and other
charges - net (1)
60
1
11
6
42
Expenses related to acquisitions, the Merger Agreement and
dispositions (4)
6
2
1
1
2
Purchase accounting adjustments (5)
2
1
-
3
(2
)
Loss on debt extinguishment (7)
3
-
-
-
3
Depreciation and amortization
148
34
34
38
42
Interest expense - net
79
21
18
20
20
Income tax expense (benefit) (6)
72
35
5
(4
)
36
Total Non-GAAP adjustments
370
94
69
64
143
Non-GAAP adjusted EBITDA
$
305
$
90
$
77
$
53
$
85
Net sales
$
3,886
$
1,015
$
943
$
929
$
999
Non-GAAP adjusted EBITDA margin %
7.8
%
8.9
%
8.2
%
5.7
%
8.5
%
(1)
Restructuring, impairment and
other charges-net: Restructuring charges for employee termination
costs, lease terminations, other costs, multiemployer pension plan
withdrawal obligations, impairment charges for goodwill, intangible
assets and other long-lived assets. Refer to the Reconciliation of
GAAP to Non-GAAP Measures schedules for more information.
(2)
Termination fee from Quad: On
July 22, 2019, Quad/Graphics, Inc. ("Quad"), and the Company
entered into a letter agreement (the "Letter Agreement"), pursuant
to which the parties agreed to terminate the merger agreement (the
"Merger Agreement"). The Company received a $45 million termination
fee pursuant to the Letter Agreement. The Company incurred
transaction costs of approximately $26 million associated with the
Merger Agreement, of which $5 million was incurred in 2018.
(3)
Settlement of retirement benefit
obligations: During the three months ended March 31, 2019, the
Company completed a partial settlement of its retirement benefit
obligations, and as a result, the Company’s pension assets and
liabilities were remeasured as of the settlement date. The Company
recorded a non-cash settlement charge of $135 million in settlement
of retirement benefit obligations in the condensed consolidated
statements of operations during the three months ended March 31,
2019. There were additional immaterial lump-sum settlements
(unrelated to the transaction noted above) that resulted in a
non-cash settlement charges of $2 million during the nine months
ended September 30, 2019.
(4)
Expenses related to acquisitions,
the Merger Agreement and dispositions: Legal, accounting and other
expenses associated with completed and contemplated acquisitions
and dispositions; and costs associated with the Merger
Agreement.
(5)
Purchase accounting adjustments:
Purchase accounting inventory step-up adjustments and any gains
associated with acquisitions.
(6)
Income tax (benefit) expense: The
three months ended March 31, 2019 included a $34 million benefit
associated with the Company's settlement of retirement benefit
obligations. The three months ended September 30, 2018 included a
$25 million non-cash provision primarily for the write-off of a
deferred tax asset associated with the Company's disposition of its
European printing business on September 28, 2018.
(7)
Loss on debt extinguishment: Loss
related to a partial debt extinguishment.
LSC Communications, Inc. Reconciliation of GAAP to Non-GAAP
Measures For the Three Months Ended September 30, 2019 and 2018 (in
millions, except per share data) (UNAUDITED)
For the
Three Months EndedSeptember 30, 2019 For the Three Months
EndedSeptember 30, 2018 Net income (loss) Net income
(loss)per diluted share Net (loss) income Net (loss)
incomeper diluted share GAAP basis measures
$
24
$
0.69
$
(4
)
$
(0.12
)
Non-GAAP adjustments: Restructuring, impairment and
other charges - net (1)
3
0.11
1
0.07
Termination fee from Quad (2)
(34
)
(1.00
)
Settlement of retirement benefit obligations (3)
1
0.01
-
-
Expenses related to acquisitions, the Merger Agreement and
dispositions (4)
4
0.13
2
0.03
Purchase accounting adjustments (5)
-
-
1
0.01
Income tax adjustments (6)
-
-
25
0.75
Total Non-GAAP
adjustments
(26
)
(0.75
)
29
0.86
Non-GAAP measures
$
(2
)
$
(0.06
)
$
25
$
0.74
(1)
Restructuring, impairment and other charges - net: Operating
results for the three months ended September 30, 2019 and 2018 were
affected by the pre-tax restructuring charges below of $10 million
($3 million after-tax) and $1 million ($1 million after-tax),
respectively.
For the Three Months EndedSeptember 30,
2019
2018
Other restructuring charges (a)
$
9
$
1
Impairment charges - intangibles
1
-
Total restructuring, impairment and other charges - net
$
10
$
1
(a) For the three months ended September 30, 2019 other
restructuring charges included other facility costs, costs
associated with new revenue opportunities and cost savings
initiatives implemented in 2019, and multi-employer pension plan
withdrawal obligations related to facility closures. The three
months ended September 30, 2018 included other facility costs and
pension withdrawal obligations related to facility closures,
partially offset by a gain related to the disposition of the
Company's European printing business on September 28, 2018.
(2)
Termination fee from Quad: On July 22, 2019, Quad and the Company
entered into a Letter Agreement, pursuant to which the parties
agreed to terminate the Merger Agreement. The Company received a
$45 million termination fee ($34 million after-tax) pursuant to the
Letter Agreement. The Company incurred transaction costs of
approximately $26 million associated with the Merger Agreement, of
which $5 million was incurred in 2018.
(3)
Settlement of retirement benefit obligations: During the three
months ended September 30, 2019, there were immaterial lump-sum
settlements that resulted in a total non-cash settlement charge of
$1 million ($1 million after-tax).
(4)
Expenses related to acquisitions, the Merger Agreement and
dispositions: The three months ended September 30, 2019 included
pre-tax charges of $10 million ($4 million after-tax) primarily
related to the Merger Agreement. The three months ended September
30, 2018 included pre-tax charges of $2 million ($2 million
after-tax) related to legal, accounting and other expenses
associated with completed and contemplated acquisitions.
(5)
Purchase accounting adjustments: The three months ended September
30, 2018 included pre-tax charges of $1 million ($1 million
after-tax) as a result of changes to purchase price allocations
related to prior acquisitions.
(6)
Income tax adjustments: The three months ended September 30, 2018
included a $25 million non-cash write-off primarily due to a
deferred tax asset related to the Company's disposition of its
European printing business. Note: The income tax impact is
calculated using the tax rate in effect for the non-GAAP
adjustments.
LSC Communications, Inc. Reconciliation of GAAP
to Non-GAAP Measures For the Nine Months Ended September 30, 2019
and 2018 (in millions, except per share data) (UNAUDITED)
For the Nine Months EndedSeptember 30, 2019 For the Nine
Months EndedSeptember 30, 2018 Net (loss) income Net
(loss) incomeper diluted share Net (loss) income Net
(loss) incomeper diluted share GAAP basis measures
$
(126
)
$
(3.78
)
$
(7
)
$
(0.21
)
Non-GAAP adjustments: Restructuring, impairment and
other charges - net (1)
36
1.09
13
0.39
Termination fee from Quad (2)
(34
)
(1.01
)
Settlement of retirement benefit obligations (3)
102
3.05
-
-
Expenses related to acquisitions, the Merger Agreement and
dispositions (4)
16
0.49
3
0.08
Purchase accounting adjustments (5)
-
-
3
0.08
Income tax adjustments (6)
1
0.02
26
0.76
Total Non-GAAP
adjustments
121
3.64
45
1.31
Non-GAAP measures
$
(5
)
$
(0.14
)
$
38
$
1.10
(1)
Restructuring, impairment and other charges - net: Operating
results for the nine months ended September 30, 2019 and 2018 were
affected by the pre-tax restructuring charges below of $47 million
($36 million after-tax) and $18 million ($13 million after-tax),
respectively.
For the Nine MonthsEnded September 30,
2019
2018
Other restructuring charges (a)
$
21
$
11
Employee termination costs (b)
5
7
Other charges (c)
1
1
Impairment charges - intangibles (d)
18
-
Impairment charges - machinery and equipment (e)
2
-
Reduction of goodwill impairment charges (f)
-
(1
)
Total restructuring, impairment and other charges - net
$
47
$
18
(a) For the nine months ended September 30, 2019, other
restructuring costs included other facility costs, costs associated
with new revenue opportunities and cost savings initiatives
implemented in 2019, and multi-employer pension plan withdrawal
obligations related to facility closures. The nine months ended
September 30, 2018 included charges related to facility costs, a
loss related to the Company's disposition of its retail offset
printing facilities and pension withdrawal obligations related to
facility closures, offset by a gain related to the disposition of
the Company’s European printing business. (b) For the nine
months ended September 30, 2019, employee-related termination costs
primarily resulted from the closure of one facility in the
Magazines, Catalogs and Logistics segment. For the nine months
ended September 30, 2018, employee-related termination costs
resulted from the closure of one facility in the Magazines,
Catalogs, and Logistics segment and the reorganization of certain
business units and corporate functions. (c) Other charges
related to the Company's multi-employer pension plan withdrawal
obligations unrelated to facility closures. (d) As a result
of the faster pace of decline in demand, negative revenue trends
and lower expectations of future revenue to be derived from certain
customer relationships, management determined that a certain
definite-lived customer relationship intangible asset recorded in
the magazines and catalogs reporting unit was not recoverable.
Therefore, the charges during the nine months ended September 30,
2019 are primarily due to a $17 million impairment charge for the
three months ended June 30, 2019, which fully impaired the asset.
(e) For the nine months ended September 30, 2019, the
Company recorded $2 million of net impairment charges related to
machinery and equipment associated with facility closings in the
Magazines, Catalogs and Logistics segment. (f) For the nine
months ended September 30, 2018, there was a reduction of $1
million of goodwill impairment charges as a result of a $1 million
adjustment of previously recorded goodwill associated with prior
acquisitions.
(2)
Termination fee from Quad: On July 22, 2019, Quad and the Company
entered into a Letter Agreement, pursuant to which the parties
agreed to terminate the Merger Agreement. The Company received a
$45 million termination fee ($34 million after-tax) pursuant to the
Letter Agreement. The Company incurred transaction costs of
approximately $26 million associated with the Merger Agreement, of
which $5 million was incurred in 2018.
(3)
Settlement of retirement benefit obligations: During the three
months ended March 31, 2019, the Company completed a partial
settlement of its retirement benefit obligations, and as a result,
the Company’s pension assets and liabilities were remeasured as of
the settlement date. The Company recorded a pre-tax non-cash
settlement charge of $135 million during the three months ended
March 31, 2019. There were additional immaterial lump-sum
settlements that resulted in non-cash settlement charges of $2
million during the nine months ended September 30, 2019. There were
total pre-tax non-cash settlement charges of $137 million ($102
million after-tax) in settlement of retirement benefit obligations
in the condensed consolidated statements of operations during the
nine months ended September 30, 2019.
(4)
Expenses related to acquisitions, the Merger Agreement and
dispositions: The nine months ended September 30, 2019 included
pre-tax charges of $22 million ($16 million after-tax) primarily
related to the Merger Agreement. The nine months ended September
30, 2018 included pre-tax charges of $4 million ($3 million
after-tax) related to legal, accounting and other expenses
associated with completed and contemplated acquisitions.
(5)
Purchase accounting adjustments: The nine months ended September
30, 2018 included pre-tax charges of $4 million ($3 million
after-tax) as a result of purchase accounting inventory step-up
adjustments and changes to purchase price allocations related to
prior acquisitions.
(6)
Income tax adjustments: Included tax expense of $1 million for each
of the nine months ended September 30, 2019 and 2018 that was
recorded due to the unfavorable impact associated with share-based
compensation awards that lapsed during each of the periods. The
nine months ended September 30, 2018 included a $25 million
non-cash write-off primarily due to a deferred tax asset related to
the Company's disposition of its European printing business.
Note: The income tax impact is calculated using the tax rate in
effect for the non-GAAP adjustments.
LSC Communications,
Inc. Total Company GAAP to Non-GAAP Adjusted EBITDA and Margin
Reconciliation For the Three Months Ended September 30, 2019 and
2018 and Twelve Months Ended September 30, 2019 (in millions)
(UNAUDITED)
Total LSC Communications Q3 2019 LTM
Q3 2019 Q2 2019 Q1 2019 Q4 2018 Q3
2018 Q2 2018 Q1 2018 Net sales
$3,487
$834
$869
$845
$939
$1,015
$943
$929
GAAP net (loss) income
(142)
24
(24)
(126)
(16)
(4)
8
(11)
Restructuring, impairment and other charges - net
64
10
24
13
17
1
11
6
Termination fee from Quad
(45)
(45)
-
-
-
-
-
-
Settlement of retirement benefit obligations
137
1
1
135
-
-
-
-
Expenses related to acquisitions, the Merger Agreement and
dispositions
28
10
5
7
6
2
1
1
Purchase accounting adjustments
(1)
-
-
-
(1)
1
-
3
Depreciation and amortization
123
29
31
31
32
34
34
38
Interest expense - net
79
20
19
19
21
21
18
20
Income tax (benefit) expense
(43)
-
(3)
(37)
(3)
35
5
(4)
Non-GAAP Adjusted EBITDA
$200
$49
$53
$42
$56
$90
$77
$53
Non-GAAP Adjusted EBITDA margin
5.7%
5.9%
6.1%
5.0%
6.0%
8.9%
8.2%
5.7%
Net cash provided by (used in) operating activities
$277
$86
$27
($24)
$188
$ -
($2)
($24)
Capital expenditures
(71)
(11)
(21)
(28)
(11)
(15)
(17)
(20)
Free cash flow
$206
$75
$6
($52)
$177
($15)
($19)
($44)
LSC Communications, Inc. Segment GAAP to Non-GAAP Adjusted
EBITDA and Margin Reconciliation For the Three Months Ended
September 30, 2019 and 2018 and Twelve Months Ended September 30,
2019 (in millions) (UNAUDITED)
Magazines, Catalogs and
Logistics Q3 2019 LTM Q3 2019 Q2 2019
Q1 2019 Q4 2018 Q3 2018 Q2 2018 Q1
2018 Net sales
$1,651
$392
$380
$403
$476
$463
$401
$427
(Loss) income from operations
($91)
($6)
($42)
($31)
($12)
$1
($6)
($14)
Depreciation and amortization
56
13
13
15
15
16
15
16
Restructuring, impairment and other charges - net
45
4
20
11
10
-
6
4
Non-GAAP Adjusted EBITDA
$10
$11
($9)
($5)
$13
$17
$15
$6
Non-GAAP Adjusted EBITDA margin
0.6%
2.8%
(2.4%)
(1.2%)
2.7%
3.7%
3.7%
1.4%
Capital expenditures
$32
$6
$12
$10
$4
$6
$5
$9
Book Q3 2019 LTM Q3 2019 Q2 2019
Q1 2019 Q4 2018 Q3 2018 Q2 2018 Q1
2018 Net sales
$1,063
$256
$289
$260
$258
$282
$266
$249
Income from operations
$45
$5
$18
$13
$9
$21
$19
$9
Depreciation and amortization
50
12
13
12
13
12
13
14
Restructuring, impairment and other charges - net
5
2
1
1
1
1
3
1
Non-GAAP Adjusted EBITDA
$100
$19
$32
$26
$23
$34
$35
$24
Non-GAAP Adjusted EBITDA margin
9.4%
7.4%
11.1%
10.0%
8.9%
12.1%
13.2%
9.6%
Capital expenditures
$34
$4
$7
$17
$6
$7
$9
$9
LSC Communications, Inc. Segment GAAP to Non-GAAP Adjusted
EBITDA and Margin Reconciliation For the Three Months Ended
September 30, 2019 and 2018 and Twelve Months Ended September 30,
2019 (in millions) (UNAUDITED)
Office Products Q3 2019
LTM Q3 2019 Q2 2019 Q1 2019 Q4 2018
Q3 2018 Q2 2018 Q1 2018 Net sales
$526
$128
$139
$119
$140
$145
$154
$123
Income from operations
$39
$8
$13
$8
$10
$15
$13
$2
Depreciation and amortization
11
3
3
3
2
4
3
4
Restructuring, impairment and other charges - net
7
2
1
-
4
-
1
1
Purchase accounting adjustments
-
-
-
-
-
-
-
1
Non-GAAP Adjusted EBITDA
$57
$13
$17
$11
$16
$19
$17
$8
Non-GAAP Adjusted EBITDA margin
10.8%
10.2%
12.2%
9.2%
11.4%
13.1%
11.0%
6.5%
Capital expenditures
$1
$ -
$1
$ -
$ -
$ -
$1
$ -
Other Q3 2019 LTM Q3 2019 Q2
2019 Q1 2019 Q4 2018 Q3 2018 Q2
2018 Q1 2018 Net sales
$249
$58
$61
$63
$67
$125
$122
$130
Income from operations
$20
$5
$8
$4
$3
$9
$7
$7
Depreciation and amortization
5
1
1
1
2
2
2
4
Restructuring, impairment and other charges - net
1
-
-
-
1
-
-
-
Non-GAAP Adjusted EBITDA
$26
$6
$9
$5
$6
$11
$9
$11
Non-GAAP Adjusted EBITDA margin
10.4%
10.3%
14.8%
7.9%
9.0%
8.8%
7.4%
8.5%
Capital expenditures
$1
$ -
$ -
$1
$ -
$1
$1
$1
Corporate Q3 2019 LTM Q3 2019 Q2
2019 Q1 2019 Q4 2018 Q3 2018 Q2
2018 Q1 2018 Net sales
($2)
$ -
$ -
$ -
($2)
$ -
$ -
$ -
Operating expenses
($68)
($21)
($13)
($13)
($21)
($5)
($15)
($10)
Investment and other (income)-net
(41)
(9)
(9)
(10)
(13)
(11)
(13)
(11)
Depreciation and amortization
1
-
1
-
-
-
1
-
Restructuring, impairment and other charges - net
6
2
2
1
1
-
1
-
Expenses related to acquisitions, the Merger Agreement and
dispositions
28
10
5
7
6
2
1
1
Purchase accounting adjustments
(1)
-
-
-
(1)
1
-
2
Non-GAAP Adjusted EBITDA
$7
$0
$4
$5
($2)
$9
$1
$4
Capital expenditures
$3
$1
$1
$ -
$1
$1
$1
$1
LSC Communications, Inc. Condensed Consolidated Statements
of Cash Flows For the Nine Months Ended September 30, 2019 and 2018
(in millions) (UNAUDITED)
2019
2018
Net (loss)
$
(126
)
$
(7
)
Adjustment to reconcile net (loss) to net cash provided by (used
in) operating activities: Impairment charges
20
-
Depreciation and amortization
91
106
Provision for doubtful accounts receivable
7
5
Share-based compensation
6
10
Deferred income taxes
(42
)
30
Settlement of retirement benefit obligations
137
-
Other
(2
)
5
Changes in operating assets and liabilities - net of acquisitions:
Accounts receivable - net
76
(44
)
Inventories
(21
)
(53
)
Prepaid expenses and other current assets
4
(3
)
Accounts payable
(53
)
(45
)
Income taxes receivable
(1
)
8
Accrued liabilities and other
(7
)
(38
)
Net cash provided by (used in) operating activities
$
89
$
(26
)
Capital expenditures
(60
)
(52
)
Acquisitions of businesses, net of cash acquired
(3
)
(54
)
Disposition of businesses
4
45
Net (payments) and proceeds from sales and purchase of investments
-
(3
)
Proceeds from sales of other assets
-
7
Net cash (used in) investing activities
$
(59
)
$
(57
)
Payments of current maturities and long-term debt
(33
)
(39
)
Net proceeds from credit facility borrowings
19
158
Debt issuance costs
(2
)
-
Payments for repurchase of common stock
-
(20
)
Dividends paid
(17
)
(26
)
Other financing activities
(1
)
(1
)
Net cash (used in) provided by financing activities
$
(34
)
$
72
Effect of exchange rate on cash and cash equivalents
1
(1
)
Net (decrease) in cash, cash equivalents and restricted
cash
$
(3
)
$
(12
)
Cash, cash equivalents and restricted cash at beginning of
year
24
35
Cash, cash equivalents and restricted cash at end of
period
$
21
$
23
Reconciliation to the Condensed Consolidated
Balance Sheets As ofSeptember 30, 2019 As ofDecember
31, 2018 Cash and cash equivalents
$
15
$
21
Restricted cash included in prepaid expenses and other current
assets
6
3
Total cash, cash equivalents and restricted cash shown in the
condensed consolidated statements of cash flows
$
21
$
24
LSC Communications, Inc. Reconciliation of Reported to Pro
Forma Net Sales For the Three Months Ended September 30, 2019 and
2018 (in millions) (UNAUDITED)
Magazines, Catalogs &
Logistics
Book
Office Products
Other
Total LSC
Q3 2018 Net Sales as Reported
$
463
$
282
$
145
$
125
$
1,015
Adjustments(1)
-
-
-
-
-
Q3 2018 Net Sales Pro Forma
$
463
$
282
$
145
$
125
$
1,015
Q3 2019 Net Sales as Reported
$
392
$
256
$
128
$
58
$
834
Adjustments(1)
-
-
-
-
-
Q3 2019 Net Sales Pro Forma
$
392
$
256
$
128
$
58
$
834
As Reported % Change
(15.5
%)
(9.6
%)
(11.7
%)
(52.6
%)
(17.9
%)
Pro Forma % Change
(15.5
%)
(9.6
%)
(11.7
%)
(52.6
%)
(17.9
%)
Non-GAAP Adjustments: Impact of changes in foreign
exchange rates
---
%
---
%
(0.1
%)
(0.5
%)
(0.1
%)
Impact of pass-through paper sales
(2.8
%)
(2.9
%)
---
%
(1.5
%)
(2.3
%)
Impact of dispositions (2)
(0.6
%)
---
%
---
%
(48.2
%)
(6.2
%)
Q3 2019 Organic % Change (3)
(12.1
%)
(6.7
%)
(11.6
%)
(2.4
%)
(9.3
%)
The reported results of the Company include the results of
acquired businesses from the acquisition date forward. The Company
has provided this schedule to reconcile reported net sales for the
three months ended September 30, 2019 and 2018 to pro forma net
sales as if the acquisitions took place as of January 1, 2018 for
purposes of this schedule.
(1) Adjusted for net sales of acquired businesses:
There were no acquisitions during the three months ended
September 30, 2019. As the Company's acquisition of RR Donnelley's
Print Logistics business (""Print Logistics"") occurred on July 2,
2018, there were no pro forma adjustments to net sales for the
three months ended September 30, 2018.
(2) Adjusted for the following dispositions: Commingle
operations on August 20, 2019 and European printing business on
September 28, 2018.
(3) Adjusted for the impact of dispositions, changes in FX
rates, and pass-through paper sales.
LSC Communications, Inc. Reconciliation of Reported to Pro
Forma Net Sales For the Nine Months Ended September 30, 2019 and
2018 (in millions) (UNAUDITED)
Magazines,Catalogs
&Logistics Book OfficeProducts Other
Total LSC Q3 2018 YTD Net Sales as Reported
$
1,291
$
797
$
422
$
377
$
2,887
Adjustments(1)
85
-
-
-
85
Q3 2018 YTD Net Sales Pro Forma
$
1,376
$
797
$
422
$
377
$
2,972
Q3 2019 YTD Net Sales as Reported
$
1,175
$
805
$
386
$
182
$
2,548
Adjustments(1)
-
-
-
-
-
Q3 2019 YTD Net Sales Pro Forma
$
1,175
$
805
$
386
$
182
$
2,548
As Reported % Change
(9.0
%)
1.0
%
(8.5
%)
(51.6
%)
(11.7
%)
Pro Forma % Change
(14.6
%)
1.0
%
(8.5
%)
(51.6
%)
(14.3
%)
Non-GAAP Adjustments: Impact of changes in foreign
exchange rates
---
%
---
%
(0.2
%)
(0.2
%)
(0.1
%)
Impact of pass-through paper sales
(1.2
%)
0.8
%
---
%
(2.5
%)
(0.7
%)
Impact of dispositions (2)
(3.1
%)
---
%
---
%
(47.3
%)
(7.4
%)
Q3 2019 YTD Organic % Change (3)
(10.3
%)
0.2
%
(8.3
%)
(1.6
%)
(6.1
%)
The reported results of the Company include the results of
acquired businesses from the acquisition date forward. The Company
has provided this schedule to reconcile reported net sales for the
nine months ended September 30, 2019 and 2018 to pro forma net
sales as if the acquisitions took place as of January 1, 2018 for
purposes of this schedule.
(1) Adjusted for net sales of acquired businesses:
There were no acquisitions during the nine months ended
September 30, 2019.
For the nine months ended September 30, 2018, the adjustments
for net sales of acquired businesses reflect the net sales of Print
Logistics (acquired July 2, 2018).
(2) Adjusted for the following dispositions: Commingle
operations on August 20, 2019, European printing business on
September 28, 2018 and retail offset printing facilities on June 5,
2018.
(3) Adjusted for the impact of acquisitions and dispositions,
changes in FX rates, and pass-through paper sales.
LSC Communications, Inc. Liquidity, Debt and Pension Summary
As of September 30, 2019 and December 31, 2018 (in millions)
(UNAUDITED)
Total Liquidity (1) September
30,2019 December 31,2018 Availability Stated
amount of the Revolving Credit Facility (2)
$
300
$
400
Less: availability reduction from covenants
146
122
Amount available under the Revolving Credit Facility
$
154
$
278
Usage Borrowings under Revolving Credit Facility
$
85
$
64
Impact on availability related to outstanding letters of credit
-
-
Total usage
85
$
64
Availability (3)
$
69
$
214
Cash
15
21
Net Available Liquidity
$
84
$
235
Short-term and current portion of long-term debt
$
127
$
108
Long-term debt
629
659
Total debt
$
756
$
767
Non-GAAP adjusted EBITDA for the twelve months ended
September 30, 2019 and the year ended December 31, 2018
$
200
$
276
Non-GAAP Gross Leverage (defined as total debt divided by
non-GAAP adjusted EBITDA(4))
3.78
2.78
Credit Agreement Consolidated Leverage Ratio (5)
3.44
2.54
Estimated Unfunded Status of Pension
Benefit Plans Based on the fair value of assets and the
estimated discount rate used to value benefit obligations as of
September 30, 2019, the Company estimates unfunded status of the
pension benefit plans would approximate $148 million compared to
$137 million at December 31, 2018. Qualified Non-Qualified &
International Total Estimated pension liabilities
$
2,120
$
97
$
2,217
Estimated pension assets
2,065
4
2,069
Estimated unfunded status at September 30, 2019
$
(55
)
$
(93
)
$
(148
)
(1)
Liquidity does not include uncommitted credit facilities located
outside of the U.S.
(2)
On September 30, 2016, the Company entered into a $400 million
senior secured revolving credit agreement (the “Revolving Credit
Facility”) which expires on September 30, 2021. Effective August 5,
2019, the aggregate principal amount was reduced to $300 million as
a result of an amendment to the Company's Credit Agreement. The
Revolving Credit Facility is subject to a number of covenants,
including, but not limited to, a minimum Interest Coverage Ratio
and a maximum Consolidated Leverage Ratio, as defined in and
calculated pursuant to the Revolving Credit Facility, that, in
part, restrict the Company’s ability to incur additional
indebtedness, create liens, engage in mergers and consolidations,
make restricted payments and dispose of certain assets. There were
$85 million and $64 million of borrowings under the Revolving
Credit Facility as of September 30, 2019 and December 31, 2018,
respectively.
(3)
The Company would have had the ability to utilize $154 million of
the $300 million Revolving Credit Facility and not have been in
violation of the terms of the agreement as of September 30, 2019.
Availability under the Revolving Credit Facility was reduced by $85
million in borrowings.
(4)
The leverage ratio calculation includes non-GAAP adjusted EBITDA
since the respective closing date of each acquisition and does not
include a full 12 months of non-GAAP adjusted EBITDA.
(5)
The Consolidated Leverage Ratio as defined in the Credit Agreement
was 3.44 at September 30, 2019. The Consolidated Leverage Ratio was
2.54 at December 31, 2018. Effective August 5, 2019, the Company
amended the Credit Agreement to increase the maximum permitted
ratio from 3.25 to 3.75. Per the amendment, the ratio will step
down to 3.50 on June 30, 2020 and further down to 3.25 on March 31,
2021. The full definition of Consolidated Leverage Ratio is
included in the Credit Agreement filed as an exhibit to the
quarterly report on Form 10-Q for the nine months ended September
30, 2019.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20191107005269/en/
Investor Contact Michael King, SVP Investor Relations
& Finance E-mail: investor.relations@lsccom.com Tel:
773.272.9275
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